South Korea is implementing sweeping regulatory changes to crypto lending services, marking a significant shift in the country’s approach to digital asset protection and financial oversight. The move comes as South Korean regulators respond to mounting concerns over high-leverage cryptocurrency lending platforms that pose substantial risks to retail investors in an increasingly volatile market environment.
The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have taken decisive action against major crypto exchanges offering excessive leverage ratios, signaling a new era of stringent investor protection measures that will reshape South Korea’s cryptocurrency market landscape.
Regulatory Crackdown on High-Leverage Services
Major Exchange Interventions
South Korea’s financial watchdogs have sounded alarms over crypto lending and margin trading services recently introduced by Upbit and Bithumb, the nation’s two dominant cryptocurrency exchanges. The intervention followed the July 4, 2025 launch of controversial lending products that allowed unprecedented leverage ratios in the Korean market.
Bithumb initiated its cryptocurrency lending service allowing users to borrow digital assets using their existing crypto holdings or Korean won as security, offering leverage ratios up to 4:1. The service encompasses 10 digital currencies, including Bitcoin, Ethereum, Ripple, and Tether. Coinciding with Bithumb’s launch, Upbit rolled out a comparable lending platform supporting three cryptocurrencies: Tether, Bitcoin, and Ripple.
The FSC and FSS summoned officials from the country’s top five crypto exchanges to address these new financial products and voice regulatory concerns regarding leverage-associated risks and potential deficiencies in investor protection frameworks. Financial authorities have expressed strong concern that these exchanges may be contravening Korea’s Lending Business Act through their high-risk operations.
Immediate Market Response
Following regulatory pressure, Upbit discontinued its Tether lending service on July 28, citing concerns that providing stablecoin lending in exchange for fees could be construed as consumer lending activity, potentially subjecting the platform to Korea’s lending regulations. Bithumb responded by modifying its service framework while preserving its 4:1 leverage structure.
The swift response from both exchanges demonstrates the significant influence of South Korean financial regulators and their commitment to protecting investors from potentially devastating losses in volatile cryptocurrency markets.
Comprehensive Regulatory Framework Development
Joint Task Force Formation
The Financial Services Commission and Financial Supervisory Service announced the establishment of a joint task force to develop a comprehensive regulatory framework for crypto lending services. The task force includes representatives from the FSC, FSS, and the Digital Asset eXchange Alliance (DAXA), a self-regulatory organization formed by the five major crypto exchanges in South Korea.
The initiative follows the launch of new lending services by domestic exchanges that have allowed users to borrow up to four times their collateral or 80% of their asset value. Regulators have raised concerns about the lack of clear safeguards for investors in a market prone to rapid fluctuations, prompting the need for a more structured approach.
Expected Regulatory Measures
The new regulatory framework is expected to include measures such as mandatory risk assessments and investor education programs, ensuring that only informed participants can access leveraged lending products. The upcoming guidelines will address several critical areas:
Leverage Limits: The task force will establish maximum leverage ratios for crypto lending services, likely aligning with traditional financial market standards where Korea’s stock market maintains a 2:1 margin cap.
Eligible Assets and Investors: New rules will specify which cryptocurrencies can be used for lending and establish criteria for user eligibility, potentially restricting access for inexperienced investors.
Mandatory Risk Disclosures: Exchanges will be required to provide comprehensive risk warnings and educational materials before allowing users to access leveraged lending products.
Transparency Requirements: Platforms must regularly report the status of borrowed loans and maintain enhanced disclosure standards for lending operations.
Virtual Asset User Protection Act Foundation
Comprehensive Legal Framework
South Korea’s regulatory approach builds upon the Virtual Asset User Protection Act (VAUPA), which came into effect on July 19, 2024. The Act represents the first Korean law solely designed to regulate the virtual asset service business, focusing on safeguarding user assets and preventing unfair practices in the virtual asset market.
The VAUPA grants the FSC comprehensive oversight and enforcement powers, including the ability to supervise, inspect, and penalize virtual asset service providers (VASPs). These entities must comply with strict rules, such as keeping at least 80% of users’ assets in cold wallets to protect against hacking and system failures.
Violation of these rules can result in penalties ranging from fines up to five times the amount of unfairly gained profits to imprisonment, depending on the severity of the violation. The law mandates segregated customer wallets, insurance cover, and stiff penalties for market abuse.
Broader Market Implications
The VAUPA establishes a foundation for addressing various forms of crypto market manipulation and establishes clear guidelines for digital asset protection. Under Korea’s 2024 legislation, crypto investors and traders active in Korea face significant regulatory risk, with broad definitions that could impact traditional market-making activities.
The statute’s broad use of the term “market making,” without further guidance or established precedent, means practices that may be common and acceptable elsewhere could now be prohibited or subject to heightened scrutiny and enforcement in South Korea.
International Context and Best Practices
Global Regulatory Alignment
The task force will review international best practices and examine crypto regulations in other major jurisdictions before issuing official guidance. This approach reflects South Korea’s commitment to aligning its digital asset policies with global standards while maintaining its focus on investor protection.
The new regulatory framework aims to balance innovation with investor protection, reinforcing the government’s commitment to a stable and transparent digital asset ecosystem. Draft rules expected in August 2025 will cover maximum leverage ratios, eligible assets and investors, and mandatory risk disclosures for lending products.
South Korea continues to position itself as a key player in the global crypto regulatory landscape, following regulatory developments in major markets including the United States, European Union, and other Asian financial centers.
Regulatory Evolution
The focus on leverage limits represents a vital milestone towards eliminating speculative excesses within digital asset markets. As crypto markets continue maturing, South Korea’s approach demonstrates how jurisdictions can adapt traditional financial regulatory principles to emerging digital asset sectors.
The emphasis on investor education and risk assessment reflects lessons learned from traditional financial markets, where excessive leverage has historically contributed to market instability and investor losses.
Market Impact and Industry Response
Exchange Adaptation Strategies
Major exchanges like Upbit and Bithumb are likely to be directly impacted, as they may be required to adjust their services to comply with the new standards. This could limit the availability of high-leverage products for retail investors and reshape the competitive landscape of the domestic crypto market.
Industry reactions have been mixed, with some market participants expressing concerns that tighter local rules could push users to offshore platforms, potentially undermining Korea’s ability to shape its own crypto market and protect its investors.
However, the regulatory clarity provided by the new framework may ultimately benefit the industry by establishing clear operational guidelines and reducing regulatory uncertainty that has previously hindered market development.
Consumer Protection Focus
The regulatory intervention reflects South Korea’s measured approach to the rapidly expanding crypto industry. While new lending services offer traders potential profit opportunities, they also pose considerable risks—particularly to retail investors who may not fully grasp the implications of leveraged trading.
Polymath CEO Vincent Kadar noted that investors are shifting from “unlock anxiety” to a more nuanced view of token releases and financial products, suggesting that sophisticated investors are becoming more focused on fundamentals including governance, utility, and alignment with long-term goals.
Economic and Technological Considerations
Market Size and Significance
South Korea’s crypto trading population represents one of the largest in the world, with approximately 15.6 million individuals—nearly 30% of the nation’s population—actively trading cryptocurrencies as of November 2024. This massive participation rate underscores the importance of robust investor protection measures in the Korean market.
Upbit handles roughly 70% of trading volume and over $7 billion in daily trades, while Bithumb ranks as the second-largest exchange. Together, these platforms control the majority of South Korea’s digital asset trading volume, making their compliance with new regulations critical for market stability.
Technological Innovation Balance
The regulatory framework aims to balance innovation with investor protection, ensuring that South Korea maintains its position as a leading cryptocurrency market while preventing excessive risk-taking that could harm retail investors.
The government’s approach recognizes the importance of technological innovation in financial services while establishing appropriate guardrails to prevent systemic risks and protect consumers from predatory practices.
Future Regulatory Trajectory
Institutional Crypto Trading Development
The FSC is simultaneously developing regulations to allow institutional crypto trading by Q3 2025, demonstrating a comprehensive approach to digital asset regulation that addresses both retail protection and institutional participation.
These parallel regulatory developments suggest that South Korea is working toward a mature cryptocurrency regulatory framework that can accommodate different types of market participants while maintaining appropriate risk management standards.
Ongoing Regulatory Evolution
The crypto lending regulations represent part of a broader second phase of South Korea’s cryptocurrency regulation framework, which will also address stablecoins and impose additional oversight on crypto firms. The initial regulatory phase, established in 2024, laid the foundation for overall market regulations.
As South Korea continues developing its digital asset regulatory approach, the focus on investor protection and market integrity will likely influence regulatory developments in other jurisdictions facing similar challenges with cryptocurrency lending and leveraged trading services.
Conclusion
South Korea’s tightening of crypto lending rules and enhanced investor protection measures represents a significant evolution in global cryptocurrency regulation. The comprehensive approach, combining immediate intervention with long-term framework development, demonstrates how regulators can address emerging risks in digital asset markets while maintaining space for innovation.
The success of South Korea’s regulatory approach will likely influence international standards for crypto lending oversight and provide valuable lessons for other jurisdictions grappling with similar challenges. As the regulatory framework takes shape, crypto exchanges and investors must prepare for a new era of heightened oversight and enhanced consumer protection in one of the world’s most active cryptocurrency markets.
The balance between innovation and protection that South Korea seeks to achieve will serve as a crucial test case for effective digital asset regulation in the global financial system.
